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The Journal of Structured Finance

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What, If Anything, Should Replace the QM GSE Patch?

Karan Kaul and Laurie S. Goodman
The Journal of Structured Finance Winter 2019, 24 (4) 59-67; DOI: https://doi.org/10.3905/jsf.2019.24.4.059
Karan Kaul
is a research associate in the Housing Finance Policy Center at the Urban Institute in Washington, DC
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Laurie S. Goodman
is the co-director of the Housing Finance Policy Center at the Urban Institute in Washington, DC
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Abstract

In 2017, approximately 400,000 high debt-to-income mortgages met the definition of the Bureau of Consumer Finance Protection’s Qualified Mortgage rule thanks to an exemption that grants QM status to high-DTI loans guaranteed by Fannie Mae or Freddie Mac. This exemption, referred to as the “GSE patch” is set to expire on January 10, 2021, or when the GSEs exit conservatorship, whichever comes first. This sets up an urgent need to determine what, if anything should replace the patch. This article offers three options to that end: 1) preserve the patch; 2) make QM determination based on overall riskiness, as measured by spread to a mortgage lending benchmark rate; or 3) drop the patch. The authors examine each option and recommend Option 2 because it strikes a healthier balance between expanding access to credit and limiting defaults to reasonable levels. Option 2 would eliminate both the DTI cap and the GSE patch while placing the private sector on a more equal footing with the GSEs.

TOPICS: Legal and regulatory issues for structured finance, legal/regulatory/public policy

  • Copyright © 2019 Urban Institute. All rights reserved. Not to be reproduced or redistributed without permission.
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The Journal of Structured Finance: 24 (4)
The Journal of Structured Finance
Vol. 24, Issue 4
Winter 2019
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What, If Anything, Should Replace the QM GSE Patch?
Karan Kaul, Laurie S. Goodman
The Journal of Structured Finance Jan 2019, 24 (4) 59-67; DOI: 10.3905/jsf.2019.24.4.059

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What, If Anything, Should Replace the QM GSE Patch?
Karan Kaul, Laurie S. Goodman
The Journal of Structured Finance Jan 2019, 24 (4) 59-67; DOI: 10.3905/jsf.2019.24.4.059
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  • Article
    • Abstract
    • HIGH-DTI LENDING UNDER QM
    • OPTION 1: PRESERVE THE GSE PATCH LARGELY AS IS
    • OPTION 2: DROP THE DTI CAP AND GSE PATCH FROM THE QM DEFINITION
    • OPTION 3: TAKE NO ACTION ON THE PATCH
    • CONCLUSION
    • ACKNOWLEDGMENT
    • ENDNOTES
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